02 Dec 6 Financial To-Do’s To Check Off Before Year-End

As the holidays approach, I begin to evaluate my clients’ portfolios and look for year-end opportunities. Here’s a list of 6 financial to-do’s to check off before year-end to ensure that you’re not leaving anything on the table.

1. Get more out of tax-loss harvesting. This tax planning strategy is probably the most common opportunity for investors who have savings in non-retirement accounts. The idea is to take a loss intentionally to offset “winners” sold in the same year.These losses can also help offset the tax cost of year-end capital gains distributions that your funds may distribute.

You might be able to get more out of selling a losing fund if you line it up with other opportunities to spruce up your portfolio. For instance, were you already looking to swap your tax-inefficient actively managed mutual funds with more tax-efficient index funds? Or perhaps you were looking to relocate your active fund from your taxable account to a tax-advantaged retirement account, where dividend payments and capital gains distributions won’t matter.

If you’re able to sell these funds at a lower tax cost,thereby harvest losses to offset any gains from another fund, and replace it with a more tax-efficient fund, you can increase the future tax efficiency of your portfolio. To avoid capital gains taxes, this would involve moving from the active fund prior to its record date and investing the proceeds in an index fund that’s not exposed to capital gains distributions at year-end.

When using this strategy, you need to pick a fund that is materially different to avoid the wash sale rule. The wash sale rule says that a loss will be disallowed if you sell a security at a loss and, within 30 days before or after the sale, you purchase a substantially identical security. For example, if you’re currently invested in an actively managed large-cap growth fund, you could consider using an indexed large-cap growth fund as a surrogate during the 30-day period. With any investment decision, there are always two sides. In this case, you may be able to reduce your current-year tax liability,but your future tax liability could increase because the holding period and cost basis in the new fund will reset or most likely be lower. For example, if you purchased a fund for $10,000 and it is now worth $8,000, you can realize the $2,000 loss to help offset gains mentioned above. But keep in mind that your cost basis in the new fund you purchase is now $8,000 in comparison to the original $10,000. This means that your future tax bill will most likely be higher.

2. Tune up your portfolio with rebalancing, and spread tax costs. Often I speak to clients who are adamantly against rebalancing their portfolios because they don’t want to pay taxes. I find this idea myopic in nature because it means they’re selling at a profit. After all, taxes are usually a result of making money! A great opportunity at year-end is the ability to spread the tax cost over two returns.

For example, let’s assume you need to rebalance your portfolio from stocks to bonds, and to do so you’ll realize $100,000 in capital gains from selling stock funds. For many retirees, $100,000 in capital gains could adversely affect them by pushing them into a higher tax bracket,subjecting them to the alternative minimum tax, or triggering Medicare premium increases. You can dampen such a ripple effect by realizing $50,000 in gains in 2015 and $50,000 in 2016. Keep in mind that waiting until 2016 to finish rebalancing adds risk because you’ll be invested more aggressively until you make final changes.

3. Maximize the impact of your gifting and charitable donations. In 2015, the annual gift exclusion is $14,000. This is the amount you can give to an individual without using your lifetime credit ($5,430,000 in 2015). Annual gift exclusion can be doubled if you’re married and performing a joint gift. If you want to help with college costs for grand kids or reduce your overall estate, this annual gift exclusion is a great opportunity. Remember appreciated securities too. These securities carry large unrealized gains. Gifting highly appreciated securities has a powerful impact. It can give you a current tax-year benefit,reduce your future tax liability, and most likely help unwind a concentrated position within your portfolio.

Within your IRAs and 401(k)s, don’t forget about your required minimum distributions (RMDs). These are the distributions you must take once you reach age 70 1/2. If you don’t satisfy this requirement, the IRS imposes a hefty 50% penalty on the amount you didn’t take by the end of the year. As we’ve seen in the past, the IRS may extend the Qualified Charitable Distribution (QCD) to 2015. Last year, this wasn’t made official until mid-December, so make sure your planning is done ahead of time. A QCD allows you to give RMDs to qualified charities without reporting the RMDs as income.This can be more powerful than a donation of after-tax money because the RMD amount donated won’t be part of your gross income.

4. Look for opportunities to convert your traditional IRA to save future tax dollars. Year after year, I hear from investors who are planning for their first RMD and struggling to mitigate the tax impact. For those of you who are retired and not yet of RMD age, you may have an opportunity. For example, if you’ve saved $1 million in a traditional IRA, your first RMD could be between $35,000 and$40,000. This additional income could push you into a higher marginal tax bracket.

You may want to evaluate your current tax situation and your expected post-RMD tax situation. If you have room within your current marginal tax bracket to absorb income without bumping into the next marginal bracket, a Roth conversion may make sense. This could allow you to lock in a lower tax bill on IRA money in comparison with what you’ll pay at RMD age. This could be a double benefit if you realize tax savings and also reduce your future RMD amounts as a result of the new, lower value of your traditional IRA.

Roth conversions aren’t specific to retirees. If you’re between jobs or have lower income in a particular year, a conversion may make sense. This is especially important for younger investors because you’ll be able to take advantage of the tax-free growth that the Roth account offers fora longer period of time. Once money has found its way to a Roth, you can rest easy knowing you won’t be subject to RMDs.

5. Spend down “use it or lose it” employer benefits dollars. An often overlooked area of year-end planning involves the benefits that your employer provides. Flexible spending accounts have a “use it or lose it” provision. This money can’t be carried over into the next year, so be sure to check your balances to ensure you aren’t leaving money behind.

Take a look at your 401(k) contributions. If your budget permits, you may be able to accelerate your contributions to maximize your savings. In 2015, the maximum employee contribution for a 401(k) is $18,000. If you’re 50 or older, you can save an additional $6,000 for a total of $24,000!Remember to act quickly on this one as these changes can take a pay period to go in effect.

Remember withholding as well. This is a great time to check your withholding to help avoid an underpayment penalty. Some employers allow you to withhold an additional amount from each paycheck to reduce what you may owe next April.

6. Evaluate the current year and make your plan for next. The majority of my clients are retirees who have worked hard to provide for a successful retirement. I often find my year-end conversations focusing on goals for the next year. If a new car is on the horizon for 2016, it may be smart to make some money available in this tax year to help spread out the tax cost of selling investments.

Take a look at your investments as well. If you have investments that are high cost and actively managed, did they perform to your expectations? As I mentioned above, this may be a good time to control what you can by lowering costs and increasing future tax efficiency.

Many of the topics I’ve mentioned involve taxes and estate planning. My goal is to help you identify opportunities within your own investments and planning. I recommend that you consult with your tax advisor and attorney before embarking on any of these year-end items.